Will Better Consumer Protection Lead to a Credit Crunch for Women?

Bryce Covert | April 26, 2011

Considering women themselves were once property, we’ve come a long way: most women can now walk into a bank and open an account, sign up for a credit card, or take out a loan. As recently as the 1970s, credit cards were issued only with a husband’s signature; it took the Equal Credit Opportunity Act of 1974 to force companies to make cards available to women. Women quickly embraced credit, and less than thirty years later they carry roughly the same amount of consumer debt[1] as men and even have more cards in their wallets than men[2] do—by a 5-to-4 margin.

But as the market opened up to female borrowers, lenders began lobbying to relax usury laws and developing predatory practices. Women who obtained credit found themselves bearing a disproportionate share of lender abuses. As a group, women are financially less stable than men are; that made them a prime target for companies looking to profit from late fees and interest on unpaid balances.

Of course, female borrowers aren’t the only ones feeling credit card company abuses; interest rates have soared, fees have stacked up and terms and conditions have become obscured at the back of lengthy contracts across the board. The industry is in desperate need of reform and regulation, and the Obama administration has already begun to rein in lenders. But some critics of increased regulation contend that deregulation allowed companies to lend to borrowers who would have faced discrimination early in the industry’s life, including women, low-income people and people of color. As those regulations are put in place, will women see some of their financial power eroded?

The most recent push toward industry regulation is the Credit Card Accountability, Responsibility and Disclosure Act[3] (CARD Act), which Obama signed into law in May 2009. The bill includes protections against interest rate increases without reason or notification and bans hikes in the first year of an account, gives consumers more time to pay their bills, forces companies to apply excess payments to the highest interest balance first and puts statements into understandable language, among other things. And more restrictions are on the way. The Dodd-Frank financial reform bill of 2010 created the Consumer Financial Protection Bureau, whose mission is to restrict predatory practices and make products safer and more transparent. While it won’t be fully functional until it has a permanent chief, once it’s up and running it will start issuing new rules and ramping up enforcement of existing ones.

These regulations are in response to bank practices that have left Americans trapped in products they don't understand and can’t pay their way out of. As usury laws were relaxed in court decision after court decision during the late 1970s and early 1980s, the credit card industry figured out how to keep consumers indebted[4]. They hid terms and fees at the back of agreements, which have bloated up to thirty pages from a page and a half in the early 1980s. They offered low teaser interest rates that ballooned to double or triple later on. As Elizabeth Warren puts it[5], “The financial industry has perfected the art of offering mortgages, credit cards, and check-overdrafts laden with hidden terms that obscure price and risk.”

Before the 1970s, credit was only given to those who the white men in charge wanted to do business with, excluding women, minorities and low-income families. Women’s exclusion from loans and credit products was mostly based on pervasive social bias, such as the idea that women were likely to stop working to become pregnant if they were under 28, making their salaries undependable. Divorced women were believed to be bad with money because they couldn’t keep a marriage under control. As Gail Collins remembers in her book When Everything Changed[6], “Men, in their capacity as breadwinners, were presumed to be the money managers on the home front as well as in business, and women were cut out of almost everything having to do with finances.” The Equal Credit Opportunity Act made it unlawful[7] for issuers to discriminate on the basis of sex, marital status, race, religion or other factors; one result was that women could rely on the income of their spouses to take out cards in their own names. The ECOA is largely responsible for beginning the move toward “democratization of credit” that brought these products to formerly underserved groups.

The industry, however, was soon pushing for deregulation, mostly to evade state usury laws that prevented companies from charging interest rates and fees over a set limit. Along with promising greater competition and lower prices, lenders told lawmakers that deregulation would allow them to further open up the market to women, minorities and low-income individuals. To a certain extent, this was true: now almost any woman can open an account, including women who may not have stable income or even income of their own. Lower-income families, all but shut out of these markets before, have better access: In 2004, 35 percent of households with income below $10,000 had credit cards[8].

But as the market expanded, so did credit card companies’ predatory practices. And that burden didn’t fall equally on men and women; women are bearing the brunt of it. The majority of industry profits come from[9] fees and interest rates garnished from those who carry a balance but can’t afford to pay it off. Single women are more likely to find themselves in this situation[8]. They are often stuck with sky-high interest rates: 11 percent of single women with credit card balances pay rates higher than 20 percent, compared to only 6 percent of single men. Another source of profit is late payments determined by arbitrary rules and paired with outsized fees. An issuer can decide a payment is late if received after 1 pm; they issue an average $28 fee for payments just one day late. Late payments often also trigger interest rate hikes, sometimes applied retroactively. Twenty-one percent of single women reported missing a payment in 2009, likely triggering these penalties and falling deeper into debt. Other predators, such as subprime lenders, have also targeted women. While they have the same credit scores, women were 32 percent more likely[10] to receive high-cost subprime mortgages than men across all income and ethnic groups.

Women are targeted for these higher-cost products along with minorities and low-income individuals because they tend to be less financially secure, making them likely targets for higher interest rates. Companies claim that this is merely due to risk-based pricing that means lower-income people receive higher interest cards, but these customers are where the real profits come from[8]. Those who revolve balances without paying them off or miss payments generate the bulk of industry profits while bearing most of the cost. And while the market for new cardholders is competitive, leading to extremely low introductory offers and other goodies, issuer policies for those who revolve balances have few differences. While wealthier customers are given cards with 0 percent APRs and reward programs, those offers are financed with the profits made off the rest.

The good news is that the CARD Act did away with many of the practices that were targeting women, including retroactive rate hikes and arbitrary late payment rules, and will help expose traps by requiring more transparent agreements. But it also may have an unintended consequence[11]. The act mandated that the Federal Reserve issue rules limiting to whom companies can lend, excluding those who can’t afford loans. One of those rules is that an applicant’s income must be taken into account. It sounds like a no-brainer. But now banks can only consider an individual’s income and not a household’s. Will women be sent back to the 1960s, once again having to rely on a husband’s income for credit?

Stay-at-home mothers (and, for that matter, stay-at-home fathers) will see their access compromised. A woman at a department store counter without her own income will likely be turned down, and a bank will ask her to involve her husband so the lender can work around the rule. However, if the card she carries is not in her name, she will not be building her own credit history. Divorced or widowed women will therefore find it harder to borrow just when they most need to.

And this could be even worse for women in abusive relationships. With less of a chance to build an independent credit history, and with landlords and some employers running credit checks, abused women may have few escape routes. Says [7]Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, “Treated responsibly, credit can become a safety net for all women whether they are single, divorced, widowed or put into other situations where they have to depend upon their existing lines of credit that are in place.”

Unfortunately, this rule is unlikely to change. The Fed issued it in its attempt to interpret Congress’s intention in the CARD Act, and changing it would require action from Congress. The best that can be hoped for is that the ramifications end up being small. If not, it may have to be revisited.

Women have much to gain from regulating the lending industry and are likely already feeling some relief from the CARD Act’s implementation. As Elizabeth Warren and her team at the CFPB start policing the industry, we should all feel it in our wallets. But regulators must take into account the history of excluding women from credit to make sure past discrimination doesn't come back to life.